Bài giảng topic 3 applications of d s

Applications of Demand and Supply Topic So far…  Demand & Supply  Equilibrium determined   by market forces Equilibrium maintained  by market forces Price Controls  Some cases market forces are not allowed to determine equilibrium price and quantity  Intervention by authorities (Govt.)    Price Ceilings Price Floors Taxes  on Producers  on Consumers “A price ceiling is the maximum legal price a seller may charge for a good or service” (Jackson page 160) P S Pe Maximum price D O fig Q Price Ceilings  Govt. sets the price LOWER than the equilibrium. Why would they this?  What is the result?  Who benefits? Who loses?  What is likely to happen?  Why would they it?    To keep the price down to an acceptable level. During wartime price controls may be imposed on essential items such as petrol, rice etc. To help the poor & the disadvantaged What are the results? P S Pe maximum price shortage D O Qs Qd fig Q What are likely to happen?  Effects:   dealing with resulting shortages => rationing black markets P Effect of price control on blackmarket prices Blackmarketeers’ profits Pb S Pe Price ceiling Pg D O Qs Qd fig Q Gainers & Losers? Gainers  Consumers who are able to obtain supplies at the price ceiling Losers:  Consumers who cannot obtain supplies (even though they are willing to purchase at the equilibrium price ) Price Controls- Consumer Surplus & Producer Surplus  Originally    After Price ceiling    CS = A+B PS = C+E+F CS = A+C PS = F What about B & E?  net loss in total surplus Price Floors A price floor is the minimum price set by the gov’t for a good or service  Govt. sets the price floor HIGHER than the equilibrium  Why would they this? What is the result? Who benefits? Who loses? What is likely to happen?    Why does the government it?   To support prices (income) in important sectors of the economy (eg. Agriculture). To protect workers (eg. minimum wages) P What is the impact? S surplus minimum price Pe D O Qd Qs fig Q Gainers & Losers? Gainers Losers:  Suppliers who receive  Consumers who have to higher price per unit pay higher prices for and probably, higher the goods. income.  Workers who are in job  Workers who were receive a higher wage previously working, are now unemployed Price Controls, CS & PS  Originally    CS = A+B+C PS = E+F After Price floor    (contd.) CS = A PS = C+F What about B & E?  net loss in total surplus Taxes on Producers  Supply curve shifts up     vertical shift = amount of tax Equilibrium price increases, equilibrium quantity decreases Notice the difference in amount of tax and increase in price. As elasticity of demand and supply vary, the burden changes Taxes on Producers  Effects of imposing tax on producers: S1 P Tax E1 Consumers’ tax burden > Producers’ tax burden if Demand is relatively inelastic Consumers’ tax burden E0 Producers’ tax burden So D Q1 Q0 Q Taxes on Producers Taxes on Producers Taxes on producers Taxes on Producers Taxes on Consumers  Demand curve shifts down     vertical shift = amount of tax Equilibrium price decreases, equilibrium quantity decreases Notice the difference in amount of tax and decrease in price. As elasticity of demand and supply vary, the burden changes Elasticity and Tax burden - Summary Elastic Inelastic Demand Producer Consumer Supply Consumer Producer   So, the burden of tax is not affected by who it is levied on (producer or consumer). It is affected by the elasticities of demand & supply [...]... amount of tax and increase in price As elasticity of demand and supply vary, the burden changes Taxes on Producers  Effects of imposing tax on producers: S1 P Tax E1 Consumers’ tax burden > Producers’ tax burden if Demand is relatively inelastic Consumers’ tax burden E0 Producers’ tax burden So D Q1 Q0 Q Taxes on Producers Taxes on Producers Taxes on producers Taxes on Producers Taxes on Consumers  Demand... Demand curve shifts down     vertical shift = amount of tax Equilibrium price decreases, equilibrium quantity decreases Notice the difference in amount of tax and decrease in price As elasticity of demand and supply vary, the burden changes Elasticity and Tax burden - Summary Elastic Inelastic Demand Producer Consumer Supply Consumer Producer   So, the burden of tax is not affected by who it is...   Why does the government do it?   To support prices (income) in important sectors of the economy (eg Agriculture) To protect workers (eg minimum wages) P What is the impact? S surplus minimum price Pe D O Qd Qs fig Q Gainers & Losers? Gainers Losers:  Suppliers who receive  Consumers who have to higher price per unit pay higher prices for and probably, higher the goods income  Workers who are... Controls- Consumer Surplus & Producer Surplus  Originally    After Price ceiling    CS = A+B PS = C+E+F CS = A+C PS = F What about B & E?  net loss in total surplus Price Floors A price floor is the minimum price set by the gov’t for a good or service  Govt sets the price floor HIGHER than the equilibrium  Why would they do this? What is the result? Who benefits? Who loses? What is likely...  Workers who were receive a higher wage previously working, are now unemployed Price Controls, CS & PS  Originally    CS = A+B+C PS = E+F After Price floor    (contd.) CS = A PS = C+F What about B & E?  net loss in total surplus Taxes on Producers  Supply curve shifts up     vertical shift = amount of tax Equilibrium price increases, equilibrium quantity decreases Notice the difference... Elasticity and Tax burden - Summary Elastic Inelastic Demand Producer Consumer Supply Consumer Producer   So, the burden of tax is not affected by who it is levied on (producer or consumer) It is affected by the elasticities of demand & supply . burden changes Taxes on Producers  Effects of imposing tax on producers: S o S 1 Q P E 0 E 1 Q 0 Q 1 Consumers’ tax burden Tax D Consumers’ tax burden > Producers’ tax burden if Demand. Applications of Demand and Supply Topic 3 So far…  Demand & Supply  Equilibrium determined  by market forces  Equilibrium maintained  by market forces Price Controls  Some cases. controls may be imposed on essential items such as petrol, rice etc.  To help the poor & the disadvantaged fig P Q O P e Q d Q s S D shortage maximum pr ice What are the results? What